Barry McCarthy: Just remind everybody that it’s just a form of marketing spending, just happens to land is a different part of the P&L, one, two, proven to be enormously affected for us. Three, more to do it, the more you erode the brand value proposition. And so you do well to use it sparingly. In the years that I’ve been here, we’ve had some form of promotional activity in almost every quarter, I think, to varying degrees. It’s up for Leslie to decide how aggressively or not. She wants to use it as part of the marketing mix on a go-forward basis, so TBD.
Operator: Our next question comes from the line of Edward Yruma with Piper Sandler. Your line is now open.
Edward Yruma: Good morning. Thanks for taking the question. Barry, in one of your earlier answers, you talked about the puts and takes on from international growth and just that faster growth would cost more money. I know you cited that restoring international growth as a goal in year 2. Kind of what do you see other than the promotional level that could help do that? And do you expect to enter new countries? Thank you.
Barry McCarthy: Still figuring it out is the long and the short answer. I would like to enter new countries, probably Western Europe first. But I don’t know when, and I don’t know how much we would spend doing it. And I hope to have the answer to those questions in the next three months, but we just don’t have it today. Long story short.
Edward Yruma: Thank you.
Operator: Our next question comes from the line of Aneesha Sherman with Bernstein. Your line is now open.
Aneesha Sherman: Hi, good morning. So two questions, please. So the first one is with higher FaaS demand and faster deliveries at the end of the quarter, does that suggest that there should have been some lag subs as in January? And is that already baked into your guide of 3.08 to 3.09 for Q3? And then second, marketing is down even as a percent of sales. I’m curious if you could give us some color on how much of that is temporary as you’re — it sounds like you’re holding back marketing on the digital app until you’ve relaunched it versus structural declines, including leaner team, lower field expenses and maybe even structurally lower as you broaden your distribution footprint and maybe need less marketing. So any color on that would be helpful. Thank you.
Barry McCarthy: The sales and marketing line item on the P&L is hot pudge, a couple of different things, just by way of reminder, — so some of it relates purely to marketing spend for the core business. Some of it relates to the commercial and wellness business. And with the retail — and the last piece is retail. And we’ve fairly dramatic. We’re in the process of dramatically shrinking the loss associated with that component of the business. Now all things being equal, as the subscription revenue grows, sales and marketing expense should shrink pretty dramatically as a percent of revenue. This is all part of tutorial, I gave investors at the Investor Day that Spotify hosted before it’s direct listing, by way of example. And at Netflix, as I recall, Sales and marketing expense fell from something like 24% to 14%, even as CAC remained relatively constant just because of the attributes of the well-run subscription business.
You only pay to acquire the marginal new sub. You don’t pay for the recurring revenue and the recurring revenue grows as a percentage of the total over time, which is why you see the reduction. Now the offsets for us will be, let’s say, international expansion. Well, our unaided brand awareness in new countries is quite low as you would expect. That means it’s that CAC will be higher as you roll out your presence in those new markets. And so we’re just going to have to balance it from an earnings and a cash flow perspective as we try to nail the growth. But we should be beneficiaries of increased word of mouth as the unaided brand awareness grows, particularly in North America and because of the growth in recurring subscription revenue, offset by growth in new markets and in new product categories that have relatively low growth like the digital app because last time I looked, I’m not sure what it is today, it was 4% unaided brand awareness.
And the net promoter score was the highest of all of the products we offer something like — I can’t remember if it’s the low 80s or mid-70s, anyway, enormously high. So question, how heavily from a marketing perspective where we’re going to lean into to that opportunity. And the answer is, as you just walked in the door, give us some time to figure that out.
Aneesha Sherman: Got it. Really helpful. And on the lag subs from your later deliveries and FaaS demand, any comments on that?
Liz Coddington: So, over the holidays, we — this is not a particular impact that is unique to this particular holiday or this particular calendar year. Over the holidays when we sell a lot of Connected Fitness units over the Black Friday, Cyber Monday, it does take us time to be able to deliver those. And so we generally do have situations where somebody may have ordered a Peloton bike or tread or roller we — but they — we don’t actually deliver it to them and they don’t activate their subscription until January. That’s not a unique phenomenon to this year. So it’s something that happens every holiday quarter into the — from quarter two into quarter three.
Barry McCarthy: But there is kind of a peak backlog coming into this quarter. Relative to other quarters.
Liz Coddington: Yes, relative to other quarters. Yes. But it’s not — it’s contemplated in our guidance. And it is not unique to this year versus other years.
Barry McCarthy: By the way, shout out to the to all of the folks at Peloton involved in the delivery of Connected Fitness units to consumers’ homes because. They substantially outperformed our expectations for the quarter, and we’re quite grateful to them for the efforts that they exerted on behalf of the business.
Operator: Our next question comes from the line of Kaumil Gajrawala with Credit Suisse. Your line is now open.
Kaumil Gajrawala: Everybody, good morning. Can you maybe just talk about — you’ve laid out your various initiatives in some detail. Can you maybe just talk about the decisions on Precor and the Ohio facility? And if there’s any sort of shift in strategy or any impact keeping those assets for a bit longer may have on some of the initiatives you’ve outlined? Thanks.
Barry McCarthy: Liz will take Pop, and I’ll take Precor. Let me begin with Precor. When I think it was in my first earnings call with investors, I said, look, strategy is to be choice and our choice is to commit ourselves to Connected Fitness. So if it’s not Connected Fitness, we’re not doing it. And that begs the question, well, okay, where does Precor fit and you doing it? And we had the worst kept secret in the planet is that we’ve been exploring the sale of Precor. And we got pretty far down the path and the price that the buyer was willing to pay dramatically dropped. And we walked away from the table. I mean at some point, across a stupid line to the point where you’re just not willing to dance anymore. And that happens for us.
Now for all of the time that we have owned it we’ve done nothing to invest in the performance of the business to its own detriment. And we’ve done a reasonable top of kind of running it for our benefit, including stocking some talent out of it into our own hardware business. It was good for us to answer them. So we’re going to reverse course. I think we understand how to add some incremental value without great expense and have a disproportionate increase in the value of the business and the overarching strategy would be run Precor for the benefit of Precor and to not dilute those efforts for the benefit of our own operating business, run it as a freestanding subsidiary. And so that’s the path we’re on. And when we see success, we will see a dramatic increase in its market value.
And then unless we have a shift in strategy where they have a shift in their product strategy. At some point, we would look to divest.
